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As Indexes Plunge, Investors Flee

The major U.S. equity indexes are down about 35 percent or more through October 23, reports Lipper, after declining 11 percent or more in the first three quarters of 2008.

What has that meant for bear funds? Some ProShares and Direxion equity funds focusing on China, real estate, precious metals and emerging markets, for instance, are up by a range of 45 percent to 127 percent. In the week ending October 23, these same funds rose by 22 percent or more.

Overall, according to Lipper, dedicated short-bias funds have risen 64 percent year to date. General U.S. Treasury funds are up 5.12 percent. In contrast, gold-oriented funds have declined 58 percent, and emerging-market funds about 59 percent.

Pimco's Total Return Institutional bond fund has a flat performance for the year through October 23; for the past 12 months, it has risen about 2 percent. According to the latest Lipper research, this bond fund includes about $78.6 billion of assets.

American Funds Growth Fund of America, with assets of $71.3 billion, is down about 38 percent. Fidelity's Contrafund, with $61.8 billion in assets, has declined 37 percent.

Lipper's fixed-income mutual fund data show that some categories are in positive territory for the third quarter and year-to-date 2008. Several of these fixed-income categories are general U.S. government fixed, GNMA (for Government National Mortgage Association or Ginnie Mae) and intermediate U.S. government. Over a 10-year period, these categories have returns of roughly 4 percent.

The third week of October sent many investors toward money-market funds, says EPFR Global. Emerging-market equity funds, meanwhile, lost around a tenth of their value. Fund flows during the week were generally negative.

Overall, only five of the 24 major equity, fixed-income and sector fund groups tracked by EPFR Global managed to post inflows. However, for the second week in a row, outflows were generally modest. For U.S. equity funds, outflows in that period represented just 0.19 percent of assets under management as risk-adverse investors largely stayed put. Funds managed for growth outperformed their value counterparts across all capitalizations, although the latter fared better in flow terms.

Emerging markets endured another punishing week in late October, says EPFR Global, as previously overlooked flaws, ranging from shaky public finances to heavy reliance on commodity export, received attention. Russia equity funds, though, posted inflows for the fourth time in six weeks as investors bet that a market backed by such large foreign exchange reserves is now oversold.

Financial-sector funds continue to attract money despite the dire economic outlook and souring real estate portfolios. During the third week of October, they took in another $506 million, bringing year-to-date inflows close to the $14 billion mark. "With all of the government support this sector is getting, it almost looks as if it's de-coupled from the real economy in the minds of many investors," explains Cameron Brandt, global markets analyst with the Cambridge, Mass.-based research firm.

During the same period, technology-sector funds attracted $266 million, their best showing since the third quarter of 2007.

And fixed-income funds remained under pressure during the third week of October, as sinking equity markets prompted investors to tap them for cash, says EPFR Global. Investors pulled $1.84 billion out of U.S. bond funds, $1.72 billion out of global bond funds and $854 million out of emerging-market bond funds, for instance.

Some investors, looking at plummeting interest rates and the massive deployment of government credit, are also questioning the ability of these funds to provide meaningful inflation protection going forward, according to the fund-research firm.

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Janet Levaux, MBA/MA, is the managing editor of Research; reach her at jlevaux@researchmag.com.

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